Townhouse as a smart first investment for a future rental?

Question

Unfortunately, my mission for a duplex has failed. I am looking into a single family home to invest in. I plan on renting out single family homes until I can get into multifamily homes and away from single family.

My question is are townhouses a smart investment for rent potential? I always hear how they are not a smart investment (unless I'm building them to sale/rent). It seems to me if a family were interested in renting, they would prefer a single home versus. essentially, an apartment home (i.e neighbors). The plus is that townhouses are significantly less in price, but I'm sure there's a reason for that.

Edward B. · Answer

@Richard Roberts,I haven't really had an issue with either one. Of course, my townhouses are in Northern Virginia and are my two most expensive properties except for a duplex I own in downtown Richmond. In Raleigh-Durham I am sure you have million dollar townhomes so it is not always apples to apples; towhnhome versus SFR. I lived in my first several rentals before I converted them as well and I can tell you that unless you plan on never getting married and starting a family, that strategy will more than likely run its course eventually. One of the things that holds a lot of investors back, myself included, is our own biases. You need to be able to step outside of that box and understand what the market demand truly is. There are plenty of quality tenants that live in lower end housing, I won't single out townhouses because I already established they can be at any price point. In fact, the rental market is often better there because there is a lot more demand and they prefer to rent. If you go too high end you are dealing with a lot more home buyers than renters. Not a golden rule, but generally true. You don't want to be in war zones but strong working class neighborhoods typically provide your best balance between profitability and stability.@Kevin L., very good points. HOAs are a necessary evil. They keep people from pulling their engines in front of your townhouse but one of those HOAs has caused me to seriously consider just selling the townhouse on more than one occasion with petty antics.

Edward B. · Answer

@Richard Roberts,There is probably some way to pull data and the MLS probably has the best data available. Personally, though, I would talk to local landlords and property managers. You can find plenty of landlords at your local REIA and there may even be landlord specific ones. I attend one here in the Hampton Roads area even though I don't have property here. Property managers you can just call. They should be more than willing to talk to you because you are a potential customer. Many of them manage hundreds of properties of all types and the good ones will definitely be able to answer that question. I'd call a few to get some different perspectives as well.

Richard Roberts · Answer

@Edward B. ,How would you go about finding the demand for things like townhouses vs SFH in terms of renting?I'm not sure where I could find that sort of data.

Edward B. · Answer

@Richard Roberts ,Yes I think that is fair. My impression, and the impression I get from the folks that have weighed in here is that it is more dependent on market and location than whether or not you have a townhouse or SFR. If there is strong demand for the townhouse rental I am looking at and the numbers work, I would absolutely buy it. I would not discriminate just because it is a townhouse.In terms of the HOA, I have alluded to the problems I have had with mine in Northern VA, but the neighborhood that I rent in now has no HOA. The next door neighbor just put a chicken coop in his back yard and the guy down the street is either running a used car lot or junk yard, it's hard to tell which based on the plethora of cars in his yard and street. This is a fairly nice neighborhood too. The houses cost $350k-$400k. A HOA probably wouldn't allow those things which can negatively impact the demand for your rental. Just something to think about.

Richard Roberts · Answer

@Edward B.Would it be fair to say that SFH vs townhouse are equal in terms of rent-ability? I'm not singling townhouses out particularly, it's just that I've been on the search for an investment property and I never really considered buying a townhouse. In my experience, people have always brought a negative stigma with investing in townhouses. Would you say that it doesn't matter either way, as long as the price, location, and quality are right?@Elizabeth O. @Kevin L.HOAs here are absurd in most areas. Every townhouse I've looked at has an HOA fee from $45/mo to around $1500/yr (most of those are because of clubhouses and pools). It seems pretty hard to escape the HOA fee and I get very weary about a tenant not abiding by the HOA rules, however petty they may be. It seems with a SFH, there is less worry about rules and regulations (other than what's in the rental agreement) but more worry with maintenance and everyday work. I suppose it's all about perspective.

Levi T. · Answer

Solid advice from Edward B. My first rental was a townhouse, long before I did a SFH or complex. Now I buy them in blocks... neighborhoods worth. They are like prepackaged buttery deals of ROI goodness, love'm. I have some on the edge of hell, and others in middle/upper class regions in norther Virginia. Townhouse reflect the market more quickly, I've seen rents climb by hundreds of dollars in a summer, long before the SFH and apartments started to move up. They can go downhill just as fast if you pick the wrong location, but in my experience, we can't rent them fast enough. Best,

Elizabeth O. · Answer

@Richard RobertsMy first two investments were townhouses bought in 2014. We placed new tenants and have had them there ever since. I'm not a fan of HOA's so I choose neighborhoods that don't have them in place. I have now moved on to single family and duplex's but that's only because it's a different area and almost all of the townhomes have an HOA.Quality doesnt seem to be any different between my townhome tenants and the others. They cashflow and I have been able to brrr one and get all of my money out to move on to another deal. If the numbers work, they work. Sometimes you need to stop looking for problems and jump in. I know that easier said than done!Best of luck to you.Elizabeth

Kevin L. · Answer

I'm not in your geography so I can't say how the differences affect tenant quality, returns, etc. But I can tell you that if you are a first-time landlord the major benefit to townhomes is that the HOA is likely responsible for major structural issues, yard/landscaping/driveways, all significant plumbing, etc. In short, some of the risk of a giant headache is shifted onto the HOA. Of course, the downside are the HOA fees and often dealing with the HOA itself. It's also important to understand any CC&Rs that restrict what you or your tenants can do.

Richard Roberts · Answer

@Edward B. thanks for the input. Do you notice SFR being rented out more than townhouses? It seems like a SFR versus a townhouse all depends on the demographic of tenants I want to attract. My primary will never be my primary, I intend to jump out and rent then on to the next investment. What are your thoughts? I guess I'm just looking for the best choice for renting the property with quality tenants.

Edward B. · Answer

@Richard Roberts, I own two townhouses (in fact, my first two rentals) and two halfpexes which are similar (adjoining walls). They have all been good rentals. They also have the appeal to homebuyers that SFRs do as opposed to a straight up multifamily property. Personally, I would prefer an SFR over a townhouse for my primary, but that is simply not the case for everyone, kind of like manufactured housing. Not my first choice but plenty of people pay plenty of money to live in mobile homes, townhouses, and SFRs. I believe that it is probably location specific, but if the numbers work, I would definitely not rule out townhouses.